EPR Properties (EPR) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the EPR Properties second quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. (Operator Instructions). As a reminder this conference is being recorded.

I would like to introduce your host for today's conference, Brian Moriarty, Vice President of Corporate Communications. Sir, you may begin.

Great. Thank you for joining us today. I'll start the call today by informing you that this conference may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, identified by such words as will be, intend, continue, believe, may, expect, hope, anticipate, or other comparable terms.

The Company's actual financial condition and results of operations may vary materially from those contemplated by such forward-looking statements. Discussion of these factors that could cause results to differ materially from those forward-looking statements are contained in the Company's SEC filings, including the Company's reports on Form 10-K and 10-Q.

Now I'll turn the call over to Company President and CEO, Greg Silvers.

Thank you, Brian and good afternoon to everyone. I'd like to remind everyone that slides are available to follow along via our website at www.eprkc.com. As we did last quarter, I'll start with our quarterly headlines, and then discuss the business in greater detail before turning the call over to our CFO, Mark Peterson, for a discussion of our financial results and capital market activity.

The first headline is continued quarterly performance momentum. This headline is supported by double digit growth in both revenue and FFO as adjusted versus same quarter previous year. Second, key investment segments demonstrate strong performance. Box office receipts remain on a very solid trajectory toward year end. Our ski portfolio finished the year even stronger than we had forecasted at the end of the first quarter. And our topped off assets continue to exhibit strong rent coverage and excitement as they open across the US.

Third, investment spending on strong pace. Our investment spending is ahead of last year's pace at this same period. And given our robust pipeline, we remain confident in our investment spending guidance. Fourth, balance sheet strengthen. Recent amendments to the Company's revolving credit and term-loan facilities extended the maturity and lowered the rate of the Company's combined facility enhancing our ability to fund our investment pipeline while lowering our cost of debt capital.

With that, I'll now move on to discuss the business in further detail. During the second quarter of 2015, we continued our strong investment momentum with investment spending for the quarter totaling $198.3 million bringing our year-to-date investment spending to $334.7 million. The quarter spending pace and balance reflects our commitment to disciplined investing and our ability to utilize deep industry knowledge and relationships to continue to access unique opportunities in our primary investment segments.

In the entertainment segment, this year's strong start in the theater exhibition business continued and strengthened through the second quarter. At the end of the quarter, box office revenues were up 8% over last year. What's more exciting is that pricing accounts for only 2% of the 8% increase, meaning that we have seen approximately 6% attendance growth.

Notwithstanding the strong film offerings of the first half of the year, industry expects are hopeful that we will maintain this level of outperformance for the entire year. If the forecasts are correct, the industry will pass the $11 billion mark in box office revenues establishing another record year. We continue to see more opportunities to partner with our exhibition operators in the deployment of high amenity theaters with both conversions of existing theaters and new build to suit opportunities.

The high amenity format has been a great success with consumers, and has increased revenue generation through growing admissions revenue and higher food and beverage spending. EPR has been at the forefront of these developments and is well positioned to continue to work with our exhibition partners to take advantage of these new growth opportunities.

For the quarter, investment spending in our entertainment segment was $36.1 million. Consisting of investments in three build-to-suit theaters, redevelopment of two existing theaters, the acquisition of one theater, along with the build-to-suit development of one family entertainment center.

During the second quarter, our recreation segment continued to demonstrate its reliability. With the ski season complete, I'm pleased to inform you that our ski portfolio improved its coverage ratio to over 2 times from the 1.85 coverage that I reported at the end of the first quarter.

Additionally, our TopGolf properties maintained their strong lease coverage of greater than 3.5 times. The strong coverage of TopGolf continued even as we delivered new locations further strengthening our master lease portfolio.

Camelback Mountain Resort had a highly successful opening of the Camelback Lodge and Aquatopia indoor waterpark during the second quarter. The second phase of the waterpark hotel opened in July, and the entire project was completed on time and on budget at approximately $120 million.

We expect the property to convert during the third quarter from its current mortgage structure into the master lease with the existing ski property and outdoor waterpark. Located at the base of Camelback Mountain, this property features a four-season mountain adventure experience combined with the largest indoor waterpark in the Northeast. Which will strengthen the overall Camelback property.

For the quarter, recreation spending totaled $57.7 million which consisted of funding for the construction of the waterpark hotel at the Camelback Mountain Resort, and the build-to-suit construction of 11 TopGolf golf entertainment facilities.

In our education segment, the positive growth story across our platform of public charter schools, early childhood education facilities, and private schools underpins the compelling opportunities in education facilities today. A new school year is approaching, and we anticipate another significant increase in charter school enrollment. Building on the existing 3 million students currently enrolled across the nation.

Early enrollment signups for the coming year in our private schools and early childhood education centers show strong growth as well. For the quarter, education spending totaled approximately $101.5 million related to acquisitions in build-to-suit construction of 16 public charter schools, four private schools, and 18 early childhood education centers.

We continue to see very strong demand for real estate financing solutions within the education space. And believe that our build-to-suit program provides us a competitive advantage in building a high-quality portfolio of education facilities. Consistent with our announced plan to reduce our investment with Imagine Schools, we sold one facility previously leased by Imagine and leased a second facility to a different operator. The total value of the properties involved was approximately $12 million, and there was no gain or loss associated with either transaction.

The Adelaar Casino and Resort project located in Sullivan County, New York remains on track with its approvals. On July 6th, 2015 the New York State Gaming Commission approved the proposed gaming regulations for publication and public comment. While we recognize the desire for greater detail on this topic, the exact timing of the remaining process is still unknown. This recent progress however clears a significant hurdle to the Commission's ability to award the gaming licenses. As we have communicated previously, we anticipate that upon conclusion of this process we'll have a special call to discuss details of this investment.

Our overall occupancy rate remains strong at 99%. We are maintaining our current investment spending guidance at $500 to $550 million, and are highly confident in our ability to meet or exceed this target given our pace of investment spending.

As a whole, our performance during the second quarter reflects our ongoing commitment to managing our existing assets and growing our portfolio with high-quality real estate in our three key investment segments. We have a truly differentiated portfolio that is anchored in growing tenant industries with strong rent coverage, and an average lease term of more than 11 years.

With that, I'll turn it over to Mark for a discussion of our financial performance and capital market activity.

Thank you, Greg. I'd like to remind everyone on the call that our quarterly investor supplemental can be downloaded from our website.

Now turning to the first slide, FFO for the second quarter increased to $64.3 million or $1.12 per share from $50.4 million or $0.94 per share in the prior year. FFO as adjusted per share was $1.08 versus $0.97 in the prior year. An increase of approximately 11%.

Before I walk through the key variances I want to discuss three items that taken together had a net positive impact on net income, but are excluded from FFO as adjusted. First, as you may remember, during the first quarter in connection with audit of our Canadian Trust by the Canadian Revenue Agency, or CRA, we recognized an additional $6.5 million in deferred tax expense which was excluded from FFO as adjusted. And an additional $1.4 million in current tax expense, which was included in FFO as adjusted based on proposed adjustments provided by the CRA.

The good news received during the second quarter was that we were successful in refuting the CRA's position. And the examination was completed with no proposed adjustments. Accordingly, we reversed the entry that was made in the first quarter and the resulting deferred tax benefit of $6.5 million along with other deferred tax benefits for the second quarter totaling $200,000 have been excluded from FFO as adjusted.

Second, as previously disclosed in April we amended, restated, and combined our unsecured line of credit and term loan facilities. In connection with this, we recognized $243,000 in costs associated with loan refinancing. Finally, we exclude from FFO as adjusted transaction costs which are required to the expense per GAAP. During the second quarter, we incurred $4.4 million related to potential and terminated transactions which was much higher than normal due to a higher level of such activity.

Now let me walk through the key line item variances for the quarter versus the prior year. Our total revenue increased 10% compared to the prior year to $101.3 million. Within the revenue category, rental revenue increased $7.9 million versus the prior year to $77.9 million and resulted primarily from new investments. The increase from new investments was partially offset by the impact of the weaker Canadian dollar exchange rate versus the prior year of over 12%, which reduced rental revenue as well as tenant reimbursements at our Canadian properties on a comparable basis by approximately $1 million.

Note that the increase was partially offset on the total revenue line item by an increase in other income of $375,000 due to favorable settlements of foreign currency swap contracts. When combined with the impact of lower property operating expense and lower income tax benefit as a result of the weaker Canadian dollar FFO as adjusted per share was lower by a little less than $0.01 compared to the prior year as a result of the movement in Canadian exchange rates.

The second quarter is typically our lowest quarter of the year for percentage rents. Percentage rents for the quarter included in rental revenue, were down slightly from prior year to about $100,000. Other income increased to $1.1 million for the quarter up from $0.2 million in the prior year. This increase was due to $500,000 in fee income and the favorable settlements of foreign currency swap contracts I discussed earlier.

Mortgage and other financing income was $18.3 million for the quarter, an increase of approximately $880,000 versus prior year. The increase was due to increased real estate lending activities offset by the $76.2 million prepayment received from Peak in December of 2014 and the sale of four public charter schools in April of 2014 for approximately $46 million.

On the expense side, our property operating expense increased by $230,000 versus the prior year due to higher bad debt expense which was partially offset by the weakened Canadian dollar exchange rate I discussed earlier.

G&A expense increased to $7.8 million for the quarter, compared to $7.1 million in the prior year due primarily to an increase in our payroll costs. This was partially offset by lower stock compensation expense, primarily as a result of our former CEO's retirement.

Our net interest expense for the quarter decreased by $548,000 to $20 million. This decrease resulted from interest capitalized on Adelaar of $2.1 million during the quarter, as well as a lower weighted average interest rate. These decreases were partially offset by more outstanding borrowings during the quarter.

Turning to the next slide, for the six months ended June 30, our total revenue was up 11% and our FFO as adjusted per share was up 10% to $2.11. Certainly strong performance through the first half of our fiscal year.

Turning to the next slide, I would now like to walk through some of the Company's key credit ratios. As you can see our coverage ratios for the quarter are strong with fixed-charge coverage at 2.8 times, debt service coverage at 3 times, and interest coverage at 3.5 times.

Our debt to adjusted-EBITDA ratio was 5.6 times for the second quarter annualized, and our debt to gross assets ratio was 43% at June 30. Note that we incur a bit of penalty in the debt to adjusted EBITDA ratio calculation with the almost $400 million we have in property under development at June 30th.

We've had to raise capital including debt to fund this amount, which is in the numerator. However, the related EBITDA will not be a part of the denominator until certificates of occupancy are issued for the buildings. Nonetheless, as you can tell by all of these ratios and metrics our balance sheet continues to be in great shape to fund our strong pipeline.

Let's turn to the next slide; I'll provide a capital markets and liquidity update.

At quarter end, we had total outstanding debt of $1.9 billion. All but about $170 million of this debt is either fixed-rate debt or debt that has been fixed through interest rate swaps with a blended coupon of approximately 5.2%. We had $100 million outstanding at quarter-end on our $650 million line of credit, and we had $6.1 million of cash on hand.

We are in excellent shape with respect to debt maturities. As of June 30th we had scheduled balloon maturities of approximately $65 million for the remainder of 2015. Less than $100 million in 2016, and $158 million in 2017.

Turning to the next slide, as discussed previously in April, we amended and restated and combined our line of credit and our term loan facilities. These amendments increased our borrowing capacity on the combined facility to $1 billion with a $1 billion accordion feature. Extended the maturity and lowered the interest rate on each component.

Additionally, as planned subsequent to the end of the quarter in July we borrowed the remaining $65 million available under the $350 million term loan portion of this facility. These proceeds were used to pay down a line of credit.

Subsequent to quarter end, we have also issued approximately 580,000 common shares under our direct stock purchase plan for net proceeds of $32.4 million. We have found this plan to be an effective low-cost way to raise equity capital in smaller amounts to fund our ongoing build-to-suit business.

Turning to the next slide, we are confirming our guidance for 2015 FFO as adjusted per share of $4.34 to $4.44, and our guidance for investment spending of $500 million to $550 million. Including in our earnings guidance, we now estimate G&A costs to total about $31 million for the year.

The mid-point of our earnings guidance implies growth in per share results of over 6% versus the prior year. I think it should be noted in the fourth quarter of the prior year we booked a termination fee of $5 million related to the pay down of our Peak Resorts mortgage note receivable. Without this large one-time benefit in the prior year, our FFO as adjusted per share guidance for this year implies a growth rate of approximately 9% at the midpoint. When combined with our over 6% current dividend yield, we believe we're on track to deliver very strong shareholder results.

Now with that I'll turn it back over to Greg for his closing remarks.

Thank you, Mark. As indicated by our headlines the second quarter results reflect a very positive quarter, and demonstrate our commitment to our strategy. We remain focused on executing our plan of leveraging industry relationships and knowledge to access and underwrite opportunities that deliver the consistent and reliable results that our shareholder and capital partners expect.

Additionally, I want to make sure that people were aware that we're holding an investor day focused on our education segment on October 8 at the Grand Hyatt in Manhattan, New York. And this will include a tour of our Brooklyn private school. More information can be found on our website, including how to register for that event.

With that, I will open it up for questions.

Thank you. (Operator Instructions) Our first question comes from the line of Tony Paolone with JPMorgan. Your line is now open.

Tony?

Hello?

Oh, there he is. Hi, Tony.

Hi, sorry. You can hear me?

Yes.

Can hear you now.

Okay, so I know you're going to have this investor day on the education segment. But as I look at your spending the private school segment seems to be outpacing the charter school stuff. And I was wondering if you could spend a minute on the background in terms of how you're getting comfortable that that's a place to put as much or not more capital into since we've heard a lot about charter schools over the years. But it seems like this private school component is taking more capital at the margin right now.

Tony, it's Greg. I think that's maybe an anomaly in the sense that I don't know that that's going to occur all the time as much as it is for this quarter. We've got several projects that have kicked off with the private school. So we do believe that there is a great opportunity, as we've talked about, in gateway cities for these private schools. It's really a nice bridge.

On the schools that we're talking about, several of them are actually operated off a platform from some of our charter school operators. So it is what we think is a very good bridge to quality education opportunities. But I do think over the long haul the charter school opportunity will continue to be a driving force in our education platform.

Okay, and then on Adelaar, can you lay out exactly what the process is from here and how many other different hurdles need to be addressed? Because it seems like -- I thought that once you guys got awarded the deal there needed to be some sort of due diligence and some pro forma stuff. But it seems like it's turning out to be more complicated than that. What's the process?

Sure, let me tell you what our knowledge of the process. With the regulations adopted, there is a 60-day period for them to accept comments. And then there's a 30-day period following after that. If there's no kind of re-working of the regulations, that they could then begin to award the license. So the timeframe that's out there is about a 90-day timeframe from the publishing of the regs.

So that --?

It's just a regulatory process that they go through.

So that would take us to October I guess at the earliest, and then is there anything else?

Well, I mean it's their discretion upon when they award the license or if they want to hold hearings or anything of that nature. But that is the prescribed timeframe within the regulatory framework.

Okay, got it. And then, Mark, just for the second half of the year you laid out sort of these tax reversals and so forth. What's the net for adjusted FFO purposes, what's the net for the second half of the year? Is it -- will you have a tax expense or a tax benefit?

A tax expense. Probably about [450] a quarter that'll stay in FFO as adjusted.

Okay, for the second half of the year.

Yes.

Great. Okay, thank you.

Which is not -- by the way is not much different than the first half of the year because we expensed nearly $800,000 in the first half net-net forgetting the deferred piece.

Okay, got it. Thank you.

You're welcome.

Thanks, Tony.

Our next question comes from the line of Dan Altscher with FBR Capital Markets. Your line is now open.

Thanks, and good afternoon everybody. Kind of a question more so at the tenant level with AMC given that there's been some management changes going on there. Is there any thoughts that maybe you guys have in terms of if there's any change to AMC's strategy or anything that you're hearing just at the tenant level that might be helpful for us to understand?

Dan, I've spoken with most of, if not all, the senior management including Gerry Lopez who left. And there does not appear -- and they've got no stated intent to have any change in strategy. In fact, I think if anything they're getting more aggressive with their thoughts on amenity theaters and conversions. I think they've announced in their recent calls they're upping the number of their planned conversions. So I think they're very firmly committed to the strategy. And we don't see any deviation from that.

Okay, that's great. And then also the comments you made just about the theaters with box office revenue and 6% attendance growth. I mean it's pretty hard to think that that's not being -- as long as the attendance growth side is not being entirely attributed to high amenity and recent initiatives. I mean is there any other way to think about that?

Well, I actually think that we think -- I mean I think we should always acknowledge that there is a certain level of content driven I mean in the sense that there are --

Sure.

-- a lot of -- but there's no doubt what the research shows is that the high amenity theaters is drawing new participants or reintroducing participants who had left the exhibition attendance metric and they're coming back. And I think that's a very, very exciting thing for the industry.

Okay, no I think that's right. And then just one quick one from me just in terms of the capital spending guidance or the investment spending guidance. I think you acknowledged that you're running clearly ahead of first half of last year and the pace is going really well. You know it seems like you could easily do in excess of the guidance.

About to review the Page 20 [assessment] that looks at the build-to-suit spending. But is there anything out there that makes you think that we maybe will not do more than what the guidance says? I mean why only do maybe the $500 million to $550 million?

I think the main thing that's driving that, Dan, is the fact that we do so much. We have quite a bit of build-to-suit, and we've learned that those do move around. We think we'll have a better view of those starts in the third quarter. And at this point in time, we would be forecasting starts that haven't actually begun yet. So we would like greater visibility before we take that number up again.

Yes, just to add to that, that Page 20 gets you to about $480 million roughly of things --

Right.

-- that are in process. Of course, so like Eric said you need new starts effectively to get to the $500 million or to the top end of $550 million. And although we feel confident of that, it's certainly not in the bag.

Yes, and maybe just one quick one around that also, just using the Page 20. It seems like a very third quarter kind of focus at least within the build-to-suit currently. I mean is that the right way to think about that at least within the very near term is going to be -- or the rest of the guidance I guess contemplates a heavier third quarter as opposed to fourth quarter?

Yes, a heavier third quarter particularly in-service is heavy in the third quarter because you have a lot of schools going in-service ahead of the school year with Camelback.

Yes.

-- finish isn't complete so although that was a mortgage to covert to [it].

Yes.

So yes, third quarter typically is our highest quarter for in-service.

All right, thanks Greg. Thanks Mark.

Thank you, Dan.

Our next question comes from the line of Craig Mailman with KeyBanc. Your line is now open.

Hi, guys. A follow up on the spending question there, you know, Greg, I think you said you're highly confident to meet or exceed the spending target here. And I get that from an earnings perspective in the back half of the year it's less meaningful. But I guess my question as we look into 2016 and kind of look at gross opportunities in the run rate, would you say that even though you guys kept the spending target the same for 2015 maybe the identified volume of opportunities has risen and put you on a better kind of trajectory heading into 2016?

I think that is accurate statement, Craig. I think the reality as we have gone into some of these segments like we said private, early ed. And now we're starting to find not just the operator we started, but two, three, four additional operators. It creates more opportunity for us. And I think our visibility to that growth, the actual start date of when the project will kick off somewhat moves a little bit from the timing. But the actual depth of the pipeline is better at this point.

I know you get --

And the -- oh --

Oh, go ahead.

I was just going to add to that. Page 20 shows what we expect of things that have started already that we expect in 2016. And you'll see a much bigger number. Of course, you'd expect that as time moves on towards the end of the year you have more identified for 2016 obviously.

Right.

But I agree with Greg. I feel good about what we do this year means for 2016.

Right, right. And I know you guys have talked in the past about the seasonality of the starts on the movie theaters. Could you guys now that you're doing more in the private schools and charter schools, what's the seasonality there in terms of the big construction pushes?

It's very interesting, Craig, because they're two totally different models. The seasonality of a charter school is totally different in the sense that it's [lapse] it's generally a nine month. So you'd think some of those will start in the fall for opening for the following fall. Just for that kind of timeframe.

The private schools are -- again we're talking about major gateway cities where we're talking Brooklyn, the San Francisco Bay area, those sorts of things. And constructing in those drives a longer timeframe. They're generally larger facilities, and they also have a larger timeframe for approvals, actual construction. So they're a little more complicated. So I would say, those are probably on the kind of closer to the 16 to 18 month type timeframe.

Okay, that's helpful. And then I know with the transformation the theater segment is going to sort of higher end you guys haven't been as worried about expirations. And just looking at 2016, 2017, you guys have eight theaters expiring. Any risk that one of those or a couple of them are given back? Or are those kind of stay as is? Or are those transformation candidates?

Do you know what, I mean there's no guarantee for anything. I will tell you what we've seen to date is the fact that we haven't gotten anything back, and generally people are wanting to engage us on theaters. So we have had on some of these some early renewals in fact. So there's some things that, like I said, are very positive. But clearly it's not without risk, but we think that we've got good operating assets. And that we will be able to either renew or we'll be able to work a deal with the new operator. Because there's just -- like I said right now there's a lot of demand for theater space.

Okay, and then just lastly, Mark, on the Camelback loan I know it's transitioned to a master release. Does it move at all on the income statement? Should we be prepared for that?

Yes, it'll move -- one of the reasons we called that out is it'll move from interest income or financing income to rental revenue in the quarter.

When does that happen in the quarter?

Well, you could probably model it mid-third quarter. We don't give guidance on the actual timing in the third quarter. But mid-third quarter would be a good estimate.

Okay, thanks, guys.

Thanks, Craig.

Our next question comes from the line of Nick Joseph with Citigroup. Your line is now open.

Thanks. What does guidance assume for percentage rents in the back half of the year?

Really a quite a bit lower number than prior year. If you recall last year, we had $800,000 in percentage rents from Peak towards the end of the year that won't repeat itself. And I think the number -- let me get that real quick. Then we're being a little bit more conservative with our waterpark given the wet June.

So the back half of the year has in its -- well the full year is about $2.5 million. And we've recorded to date about $400,000 roughly.

Okay, thanks. And then in terms of current leverage levels, how do they compare with the targets? And what does guidance assume for capital market sources in the back half of the year?

Let me just walk you through kind of how we're thinking about the capital plan. We have $100 million on our line of credit. Subsequent to the end of the quarter, we took down that term debt $65 million, and we raised $33 million in direct-stock purchase plans.

So if you think about it, just apply that to the line. My line is kind of free and clear with capital I've already taken down since the end of the quarter. So $650 million of line of credit. Uses-wise if you think about our guidance, I have $216 million of additional spend at the high end of guidance, $66 million of debt payoff. So let's call it roughly $300 million of uses. If you think of that 60/40, that would de-lever us from where we are today. As I mentioned, we're at 43% today. If you think of 60/40 on the $280 million, it'd be about $170 million of equity.

But the good news is, we have flexibility. I have the ability if I wanted to do it all on the line, and I still have quite a bit of capacity left at the end of the year and my leverage goes up to something like 45%. So I'm at 43%. Our plan suggests taking it more down to more like 41% which is consistent with where we've always been. But I think I have a lot of flexibility depending on the market to determine when and how, and how much we decide to go to raise equity.

Thanks, so then finally, Greg, as a new CEO and as you review processes have you considered moving the earnings call until the following day?

It is something I know Michael reached out to me and talked to me about it. And it's something that has came up for discussion. We're discussing it internally. All I can tell you, Nick, is we are discussing it. And I'll let you know.

Sounds good. Thanks.

Thank you.

Our next question comes from the line of Dan Donlan with Thalmann. Your line is now open.

Thank you, and good afternoon.

Thank you, Dan.

Just kind of curious on the Imagine school that you sold. What was the cap rate there? And also why the switch on the other Imagine school to a different operator?

Well, again, Dan, part of this was -- and remember the stated cap rate and remember because of the effect of interest [method] we actually also have to overcome some to have no loss or no gain. We have to overcome what would be effectively straight-line rent. But it's not in the effective interest rate. So I think that the stated cap rate was about a 9 on the sell.

As far as the change of the operator, again we were approached by an authorizer about changing out Imagine. It met with our strategy of lowering our investment exposure to that. And we worked with the authorizer to accomplish that.

Did you have to change the rent, or did it just stay kind of the same levels dating back?

I think we did change the rent. But we also extended the period. So I don't think we had any real measurable diminution of the IRR over the life of the asset.

Sure, okay. And then if I look on Page 20, it looks like some projects that were slated to be delivered in the second quarter got pushed into the third quarter. What was kind of the -- what happened with that? Is that actually what happened? And kind of what were the --

It was. It's primarily related to our Brooklyn school of which we had hoped to deliver in the second quarter, but it will be delivered third quarter prior to school opening.

If you notice, that was offset by another property that we put in service earlier than planned, by about $10 million. Because I think the net change was $33 million --

Right.

-- of difference. And so $43 of it was Brooklyn, and the other $10 was going the other way --

Okay.

[Of CLA].

Okay, and then how should we think about the deliveries and the timing of those deliveries from a modeling standpoint? Is it just the conservative or the right to think about it is just have all the income from your build-to-suits in the third quarter be delivered on or start hitting the income statement about September 1st, is that fair?

Yes, I think mid-quarter is a fair convention.

Okay, okay. And then just curious on what you guys did at Camelback building the waterpark hotel. Is that a model that's repeatable at some of the other ski hills that you have? I don't think you have -- many of the ski hills don't really have resorts or hotels on them or waterparks. So just kind of curious if that's a source of growth for you guys going forward? Or is Camelback kind of really a one-off type of a deal?

You know I think there is opportunity. I will tell you we've been contacted by several of our operators about that. Now I mean it really is location driven and dependent, you know? And if there's enough support for that. And you could downsize that to make it work. So there clearly is an opportunity set, but it has to work in conjunction with A, as I said, the performance.

But also the capabilities. Are they willing to have a professional group come in and manage that so we're not going to let necessarily a ski operation who doesn't know how to manage that sort of activity or asset all of a sudden think they just want it. It has to work. It has to underwrite. And they have to have the skills, capability to operate it.

Okay, makes sense. And then as far as the development pipeline for charter schools, how much is the new development pipeline building schools for an existing school base? So for instance, if you have a elementary school and those students are matriculating onto middle school and then onto high school. How much of your development, if you could quantify, is from kind of that repeat type of business or continuing on in the same type of market?

It's actually quite -- it's growing. You're actually dead-on with something in the sense that we are being contacted in markets where we have several charter elementary schools. And now as we've been with that group for 3, 4, 5 years they're now approaching us about middle schools. And with a plan toward a high school. So I would say we're at the beginning point of that. We probably have -- looking three or four junior highs and one high school, but that demand is growing.

Okay.

And right now we have nine expansions going on due to demand.

Yes, but those maybe expanding of elementary school as well.

Right, could be matriculating or just demand of the existing K-6.

Okay, and then I think you've done quite a bit with BASIS. What are their plans for growth? And what type of role do you think you'll play in that growth? You've been a big backer of TopGolf. And I think you've maybe had some exclusivity with them. Do you have something similar going on with BASIS? And kind of what's their growth plans as far as you're aware.

Yes, and yes we do, Dan, it's very akin to what TopGolf is. We have a right of exclusivity with BASIS for $500 million. That's a one way. Meaning that we don't have to do the deal, but we have the ability to do that.

I think part of that is maintaining their ability and how they roll out. But it's very reasonable to think that they could get on a glide path of one to two private schools a year. And if you look at those being in the $35 million to $45 million per facility, thinking about just them as an operator and you start to combine other operators along with charter schools and early ed, and you get to what is a very attractive educational platform that will drive growth in the foreseeable future.

Okay. Great. And then just lastly on the TopGolf, can you talk about how the coverage has trended there? Are the more mature sites starting to see their growth slow at all? Or did they have better coverages as they get older?

Actually, it's become remarkably stable in the sense of they're running fairly strong capacities. So they will start off unbelievably and mitigate from maybe approaching 4 down to around the 3.5 range, which seems to be kind of the long-term average for the portfolio.

Okay, thank you very much.

Thank you, Dan.

Our next question comes from the line of Rich Moore with RBC Capital Markets. Your line is now open.

Hi, guys, good afternoon.

Hi, Rich.

The number of starts you had in the quarter on various projects seemed to go down. And it seemed to be kind of modest. Was that my imagination or was there some sort of seasonality factor like you were talking about before? And are you going to see the number of starts I guess begin to pick up going forward in the various categories?

Yes, I think you're right, Rich, it was more seasonality in the sense that we'll see more starts as we get into third and fourth quarter. I think it was a lot of -- if you look in the schools, people are not starting schools now just because of the fact with starting schools that just opened it's from a build cycle it doesn't make sense to start now.

Likewise, we've got 11 TopGolfs going under construction right now. And some of that is their capability. We've got several of those that will deliver here in third quarter and fourth quarter. And they will turn right around and ramp back up to more starts.

Okay, got you. So it didn't have anything to do with any change you made --

No.

--in your new role or anything like that?

No, no.

Okay, yes. Got you. Okay, and then on the TopGolfs are you still targeting 30 as sort of your (inaudible).

Yes, I think it will be around that number. I think ours is targeted more at an investment level. So it'll be driven kind of on the land cost and everything else. But we think it'll be somewhere in that 25 to 30 range.

Okay, good thanks. And then on the CNL Lifestyle portfolio you guys were looking at, is there any update on that? Is there any news about that?

No, I don't think it's appropriate that we comment on anything, but beyond just it was again something that is widely published that they were looking at. But we're not going to comment on any specific deal.

Okay, good. Thanks. And then I happened to be reading an article where Paramount is working I guess with AMC and Cineplex to kind of shorten the time the consumers can get a movie at home from 90 days to 2 weeks. I don't know if you saw that, and if you did --

Actually --.

Oh, you did.

Yes, Rich, not only did I see it, I spoke to both CEOs about it. So to Gerry before he left and to Ellis Jacob at Cineplex regarding that. They both maintain that if you follow what it was, is that it's very specific scenario. They are two very -- they're horror genre pictures. And have a very specific timeframe of which they can operate and a very short shelf life relative to their viability.

It's an agreement that they worked out. It actually is that it can go to direct after it goes below 300 screens in the US. If you look at their numbers that they earn over 90% to 95% of their revenue in the first 14 days of a horror picture. So the estimate is this would go to direct in day 17. And then they would actually get to participate in the sharing of revenues beyond that.

But both were very quickly to point out that this was a test model. They did not think this would go broadly beyond these very specific short genres of certain pictures. And that they had no expectation that for the broadly accepted movies that the 75 day window would change.

And Regal, the biggest operator, has come out and said they're not going to participate.

Yes.

Okay, good. Is it 75 or 90 days? I thought it was 90 days they had.

It's 75 days which is the absolute shortest period before release to any alternatives. But that's at that point most films have earned 95% to 97% of their revenue.

Okay, great. And, Mark, thank you. Thank you, Greg. And, Mark, could you remind me when the preferreds are callable? Is it anytime in the near future?

Well, the two converts really aren't callable. They're convertible by the shareholder. There is a -- we have one that's callable I believe -- I think --

Why don't we get back to you on that.

Yes, I think rather than just --

Okay, that's fine.

It's a five-year call, so it's got to be 18 I think in terms of the [days].

Oh, okay. Not soon.

Right.

No.

Okay, and then the last thing, guys, is did you say, Mark, that bad-debt expense was up for the quarter?

Yes.

And what was the bad-debt expense on?

It was really a tenant at FEC, Family Entertainment Center, that we've had kind of out of our guidance all year long. But we're still recording revenue and bad-debt expense because they're making progress. We'll see whether they survive or we'll get another tenant in to replace them.

Okay, so it's just that one guide?

Yes.

Okay, great. Thanks, guys.

Thank you, Rich.

Our next question comes from the line of Jane Wong, with Bank of America. Your line is now open.

Hi, good afternoon. Just kind of a housekeeping question, for the theater acquisition in the second quarter, what was the cap rate? And can you give us an update on what you're seeing in terms of the acquisition environment? What's in your pipeline? And the competition you're seeing? Any increase in assets available for sale?

Sure, the theater acquisition was around an 8. There's no doubt, Jane, that there is significant competition for standing inventory. There is a lot of both public REITs and other private owners that will actively pursue that. We've said that market is down. The cap rate compression is pretty significant. I mean those are not the kind of cap rates we're enjoying in our build-to-suit program.

But we thought that was an opportunity for us to buy an asset that will be and is in the process of being converted. So there may be an opportunity for deployment of capital that would change our returns. But I think overall you're looking at a market that's probably comfortably in the somewhere to 7% to 7.5% for standing inventory on theaters. And it probably goes below that on the Coast.

Thank you. And what about for your other segments?

I think as we said, I mean that clearly the broadest market that we have, early childhood education, we see a lot of those. I mean we're building those, but those are in the low 7s. We're starting to see charter schools that are trading in what I would call mid-to upper 7s.

We traded in Imagine like I said at a 9, now it's had somewhat of a troubled name so we thought it was the right thing to do for our kind of asset management. But I think there's no doubt that these assets are trading. One of our public REITS competitors did a ski deal at 8. So I think cap rate compression is there.

Now we've been able to maintain what we think are nice spreads relative to that in our ability to kind of access product that others are not. We're not necessarily executing on kind of well circulated bid processes. We're accessing our product through our relationships. And we think we're able to be value-add in that equation.

Thank you.

At this time, I'm showing no further questions over the phone.

Well, I just want to thank everyone for joining us today. And we look forward to talking to you on next quarter.

Thank you.

Thank you.